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AFP 2023 Blog

AFP 2023 Blog

AFP 2023 Blog

4 Tips for High-Impact Budgeting and Forecasting

Jun 13, 2023

High-impact finance functions have sound accounting architecture, implement proven finance processes and methodologies, and provide people with the appropriate tools to succeed. So say the experts, John Baule, CEO and Co-founder of FutureView Systems, Keith Haas, CFO of FutureView Systems, and Jen Murphy, Controller, ACA Compliance Group, in one of our most popular sessions from AFP 2022.

With these workflows in place, we can elevate our finance functions to higher levels such as being proactive, planning for multiple scenarios, infusing strategic conversations with actionable insight, and driving accountability and decision-making. But how do get to that level? How do you create such a system? Read on for four actionable tips to help you get started.

1. Ensure your accounting infrastructure is in sync with your budget framework.

Baule starts with the analogy of a scoreboard at a game. “Everyone understands those rules before the game starts; you can’t design your rules and scoreboard in the middle of the game,” said Baule. “And business is no different.”

However, there is a lot more to a scoreboard than just the numbers you see on the face of it. Underlying every one of the numbers you see is a defined calculation that’s been thought through. If a controller is recording information in a way that doesn’t make it accessible to an FP&A group — for example, if they’re recording expenses, but not including vendor data in the expenses, or reporting at business level when FP&A wants SKU level — it creates extra effort or assumptions for FP&A to analyze and create a basis for forecasting.

On the flip side, if FP&A builds a forecast on a foundation of data that doesn’t reflect the actuals that have occurred to date, then the forecast is not very meaningful and difficult to act on. Maintaining that synchronization between everything that's happened as recorded in the general ledger and usable by FP&A and business leaders is vital.

There are six capabilities that are critical for an effective finance and accounting function. The first three describe good accounting and controllership hygiene:

  1. Close the books in a timely manner.
  2. P&Ls drive business unit accountability.
  3. Automate manual, error-prone processes.

The next three describe how you leverage accounting information to drive the conversations within the business and influence decisions with data:

  1. Develop a clear analytical framework.
  2. Track performance against the budget targets.
  3. Follow a regular, iterative forecasting process.

How do you organize your information and your accounting data? A responsibility matrix is one way to align accounting transactions with your business functions and create accountability. Each department’s accounting transactions include all the expenses for each employee, consultant and vendor related to that department, assigned to the appropriate expense type. Each transaction has a who (the owner and approver), a where (the department) and a what (the expense type).

2. Identify and collaborate with budget owners and communicate a clear process for accountability.

“Budgets get a bad rap,” said Haas. As the finance and accounting leader, you're at the center of this process that requires orchestration of many people across different departments. Think about what is required for process excellence. “I find that the best budget cycles start with a calendar where all the meetings are scheduled at the beginning, so everybody is clear on the timing and what's going to happen next.”

This doesn’t mean that finance owns the budget — that should be a shared responsibility among business leaders. Instead, finance should manage the process and impact the outcome. Finance is responsible for communicating assumptions, timing and requirements, and also listening to make sure that participants understand each other and understand the message, which may include clarifying terminology, definitions and terms. This collaborative approach gives budget owners an opportunity to provide their expert input, while accepting responsibility for the targets they helped set in the annual budget.

3. Align executives and the team with high-level targets for the upcoming budget.

A high-impact budget process aligns senior management and the board with a common goal and drives accountability throughout the business. However, there are three major reasons why budgets fail, according to Baule. The first is if your budget is a finance-only exercise. If the rest of the organization never buys in, that kills the accountability element.

The second reason is if executive leadership, such as the board or the CEO, only quasi-accept the budget, meaning they just want to get it done, but they don’t believe in it or think spending should be allocated as it is in the budget. That kills the idea of having a compass.

And the third reason is if your budget turns into a massive data collection exercise where spreadsheets fly back and forth willy-nilly across the organization. All three of these are the opposite of executive alignment!

“Budgets need to be collaborative,” said Baule. Otherwise, when targets are missed, department leaders will simply deny any understanding of the budget. A collaborative process, one that is managed by finance and architected by finance, is going to ensure that you don't have unrealistic budgets and will help to prevent sandbagging.

Haas recommends a hybrid approach that combines top down and bottoms up budgeting. The first step is to get buy-in from the top: the CEO and board. Second, set benchmarks that provide a starting point to work from.

“Benchmarking can help set objective performance standards for the upcoming year,” said Haas. It allows you to bring in an outside perspective and focus some of the discussion, such as where you want to be relative to your peers, and use that data to set targets for all of your key metrics, e.g., revenue, growth margin, EBITDA, sales efficiency and customer satisfaction.

Third, the finance team must work with business partners to build a detailed plan and then present it internally for debate and approval.

Finally, anticipate and prepare for the board’s questions before submitting the presentation for board approval. Compare it to the original proposed budget and preliminary targets, and always include quantified opportunities for upside and execution risks.

4. Leverage robust tools to efficiently operate your budget and forecasting processes.

Today, we're fortunate to have integrated reporting and forecasting tools available. These tools provide much greater efficiency, thereby eliminating errors to deliver accurate and informative insights.

They also make collaboration much easier, allowing for distribution outside of finance, so everyone is working on “one sheet of music,” said Baule.

Standalone FP&A tools shine in terms of customization, centralizing multiple data sources, and generating effective reports and metrics, while ERP systems can handle and account for transaction details with ease. In short, there are many benefits to employing these technologies.

“Organize your data, clarify accountability across the company, improve the efficiency, and then run that collaborative forecasting process with your business leaders, and you will make an impact,” said Baule.

Looking to learn more so you can take your finance function to the next level? Register for AFP 2023.